So said my grandfather, who worked at the famous Churchill Downs horse-racing track in Louisville, Ky. In those days, women weren’t permitted at the betting windows, so they hired little boys to run money and betting slips back and forth.

Supporting his family as a bet runner helped Grandpa develop a gift for weighing risk against potential return. It came in handy during the Great Depression, along with the always-uncertain decades thereafter.

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This basic life lesson, to risk only within your means, has somehow escaped the people who oversee San Diego County’s public pension system.

In April, pension board members unanimously approved a new investment strategy that dramatically increases use of “leverage,” a form of borrowing.

There’s nothing inherently wrong with leverage, which allows you to buy a lot of asset with a little equity. But it also magnifies losses when markets turn against you, as millions of homeowners learned in the recent real estate crash.

The county’s strategy seeks to avoid this outcome by spreading risks widely. The idea is that when U.S. stock values fall, investors might bid up, say, foreign bonds or commodities, containing losses in a diversified portfolio.

It’s an elegant theory, supported by dazzling charts and graphs. But markets tend to move together in financial panics, and you never know when the next one’s coming.

So what’s this got to do with leverage?

The county’s remarkably transparent goal is to raise the risk of losses in hopes of lifting returns, because the government and its workers haven’t saved enough to fully fund checks promised to retirees in the future.

“We’re trying to bring up the risk, not keep the return and dial down the risk,” is how the county’s chief investment strategist, Lee Partridge of Salient Partners, described the approach in April.

Without question, retirees need him to succeed.

The county’s unfunded liability grew by 4.7 percent to $2.45 billion in the 2013 fiscal year, according to the latest report.

What’s more, checks to retirees are surpassing contributions from workers and county government. This trend of negative cash flow is projected to accelerate as more people retire.

In response, the county is “reaching for yield,” in the jargon of the investing industry. If the bough breaks, it will fall on taxpayers and retirees.

Betting it all

As of July 1, Partridge is authorized to use the county’s $10 billion fund to put at least $20 billion at risk, mostly with options, derivatives and other arcane financial instruments.

Under the previous policy, Partridge was limited to 35 percent leverage in the county’s portfolio. Now he gets to place bets amounting to 100 percent.

And while the previous policy approved leverage to bet on the direction of relatively stable U.S. Treasuries, the new policy moves much of the county’s nest egg to volatile areas of speculative investing. Foreign junk bonds, emerging-market stocks, options on the future value of zinc … almost anything is fair game.

For perspective, the city of San Diego’s pension board allows no such leverage to boost investment exposure. Zilch. Nada.

And the city’s fund has outperformed the county’s by a mile.

Since the county hired Partridge and adopted his investment approach in October 2009, its portfolio earned an average 9.7 percent a year, according to a July memo.

That beat the county’s goal of 7.75 percent. However, over roughly the same period, the city’s fund earned 13.6 percent.

The city is not alone in such outperformance.

San Diego County’s pension fund ranked 84 out of 100 similar funds over the three- and five-year periods before Sept. 30, 2013, according to an analysis released last year by Wurts Associates, a consultant to the board.

Meanwhile, the fund spent $103.7 million in investment and administrative fees in the 2013 fiscal year. Although the board is cutting fees this year by dumping some hedge funds, it’s likely to remain one of the nation’s highest-cost funds.

Mystery deepens

If you’re wondering why the county’s board chooses high costs and low performance, you are not alone.

To deepen the mystery, consider that the board recently extended its contract with Partridge’s firm, where fees will grow to $10 million this year. The lone vote against the contract came from Dan McAllister, the county’s elected treasurer.

Yet McAllister was part of a unanimous vote in April approving the new strategy, which nearly triples potential leverage.

“As a trustee, it is my fiduciary responsibility to review and approve an appropriate asset-allocation framework that best positions SDCERA to achieve its 7.75 percent assumed rate of return,” McAllister said in an email last week.

Amazingly, the board’s decision came after a yearlong review, during which various board members said they were “deeply concerned” or had “serious questions” about Partridge’s use of leverage.

One of them was Supervisor Dianne Jacob, who has been on the board for a decade, in time to witness the collapse of two hedge fund investments, not to mention major losses on leveraged bets in the 2008 market meltdown.

“Leverage is not a bad thing, and I never said it was a bad thing,” Jacob said last week. “I said I was concerned and troubled by the Treasury portion of the portfolio.”

“We’ve changed the strategy,” she said. “It’s better because, instead of relying on a single risk-balancing tool with interest-rate exposure, we are now changing to a more flexible use of leverage.”

Luck vs. skill

Using tactics called “trend,” “momentum” and “risk parity,” much of the county’s strategy depends on Partridge’s ability to anticipate and respond to market movements.

“If things start to trend down, and they are going down at an accelerating rate, momentum gets you out of the way,” he said in April.

Trading-strategy practitioners generally fail to beat the market in the long run, and short-run success typically owes to good luck, according to decades of academic research. Although successful investors certainly exist, researchers have struggled to parse the role of luck vs. skill, let alone identify truly skilled managers in advance.

Common sense explains the challenge.

Partridge is a very smart guy. However, his success depends on being smarter, every day, than the very smart people on the other side of his trades.

Yet the board’s confidence has been bolstered by a parade of experts in recent years.

Each expert generally viewed Partridge’s ideas favorably. Notably, each derived his or her income from the financial industry.

The coincidence wasn’t lost on Jacob, who asked Brian White, the chief executive of the pension fund, to invite a prominent skeptic to brief the board.

Skeptics abound

The list of expert skeptics is long indeed.

It includes Berkshire Hathway CEO Warren Buffett, history’s most-successful investor; John Bogle, who pioneered low-cost, index mutual funds at Vanguard Group; and Gene Fama, the co-recipient of the 2013 Nobel Prize in economics who demonstrated in 1992 that price volatility in stocks (a favored measure of risk called “beta”) has no predictive value.

“What we are saying is that over the last 50 years, knowing the volatility of an equity doesn’t tell you much about the stock’s return,” Fama wrote.

In any case, White hasn’t enabled the board to hear from an expert who rejects Partridge’s thesis.

When I asked why, White said he’s relied on independent advice from Wurts Associates, a consulting firm. Wurts officials have endorsed the new investment strategy, and they generally describe their primary role as measuring whether Partridge adheres to the strategy he designed. White’s response reminded me of Mike Sebastian, a supporter of alternative investing who wrote a scholarly article on the subject called “Go Big or Go Home.”

At an early 2013 board workshop, Jacob asked Sebastian about Partridge’s proposal to boost leverage.

Sebastian responded that the leverage was far too high, offering too little potential return; the equivalent of “using a sledgehammer to swat a fly.”

Straightforward advice

My guess is that White didn’t think to call Buffett or Bogle.

Their advice is long-standing and straightforward: Ignore fads, don’t trade much, and invest primarily in America, which is still the world’s best place to grow a business. Avoid expensive advisers and keep retirement money in simple, diversified index funds made up of stocks and bonds.

“Every time something new comes up, I just scratch my head,” Bogle told me last week.

Bogle pointed to research showing trading strategies tend to do well for a while and then slump. Results inevitably return to a long-run average that’s below the overall market, because of the corrosive effect of fees.

A few pensions are belatedly emulating leveraged strategies made popular by Yale University and wealthy families — just as their luck ran out.

“We’ve had this fad, where everybody had to copy these Ivy League universities, and they haven’t done very well for the last four or five years.”

Of course, San Diego County’s fund belongs to the public, which has less tolerance for risk.

If Yale or the Rockefellers have a big loss, they can always downsize.

Incidentally, Bogle’s Vanguard Balanced Index fund, which passively invests in the entire U.S. stock and bond markets in a 60-40 ratio, has earned an average 13.66 percent annually over the last five years with a fee of 0.09 percent.

That’s about 40 percent better than San Diego County’s fund, at less than a tenth of the cost.